Market optimism regarding a potential rate cut by the U.S. Federal Reserve in September continued to rise as gold prices reached a historic high on Wednesday, July 17th.
On Wednesday, the price of gold climbed to a historic high of $2,483.73 per ounce before experiencing some pullback. The previous day, gold had already surged by 1.9%, surpassing the all-time high set in May. This surge was driven by increasing signs of decreasing inflation rates approaching the Federal Reserve’s target, leading traders to bet on an earlier and more substantial rate cut by the Fed.
Federal Reserve Chairman Jerome Powell stated on Monday that the central bank would not wait for inflation to reach 2% before cutting rates. He emphasized that the second-quarter inflation readings “certainly” boosted policymakers’ confidence that inflation is gradually moving towards the 2% target in a sustainable manner.
More Fed policymakers are expressing increasing confidence that the pace of rising prices is on track, aligning with the Fed’s objectives.
Fed Governor Christopher Waller mentioned on Wednesday that the economy is getting closer to a point where the central bank can lower borrowing costs. However, he expressed a desire to see “a little more evidence” to confirm that inflation is on a sustainable downward path.
Data shows that in June, U.S. factory output exceeded expectations, driving a robust rebound in second-quarter production.
According to the CME FedWatch tool, the market currently perceives a 98% likelihood of a rate cut by the U.S. in September.
Lower borrowing costs are often beneficial for interest-free precious metals, as they reduce opportunity costs.
Bloomberg reported that gold has surged nearly 20% this year due to large purchases by central banks, strong demand from Chinese consumers, and a global preference for safe-haven assets amidst geopolitical tensions. In a more bullish environment, momentum-focused investors are becoming a key driving force for gold once again.
Chris Weston, Research Director at Pepperstone Group Ltd., stated in a Wednesday briefing that “gold is likely to soon face a test at $2,500.”
Kitco Metals’ Senior Market Analyst, Jim Wyckoff, mentioned to Reuters that he would not be surprised if gold “sets a new all-time high in the coming weeks or even shorter.”
However, there are signs indicating the rally may have gone too far. Gold’s 14-day Relative Strength Index (RSI) hovering near 70 suggests to some investors that it is at an overbought threshold.
Wyckoff noted that China, a major gold-consuming nation, reported GDP data lower than expected, potentially dampening buying enthusiasm in the gold market today.
Official data shows that China’s economy grew by 4.7% in the second quarter, falling short of the analysts’ predicted 5.1% in a Reuters survey.